Buy more IP's with equity or save for bigger PPOR

[Toto]

Hi all,

I've been reading this forum for a while now and thought I'd make my first post. I'm just wondering what others out there might do if they were in my position wanting to upgrade from a unit to a house in 2-3 years time.

PPOR: Val - $600k
Loan amount - $200k
Current equity loan of $152k used for purchasing 3 investment properties
Available equity (keeping PPOR @80% LVR) - $128k (I haven't accesed this extra equity yet but its what is available if I use the valuation thats just been carried out by the bank)

I have 3 investment properties bought over the last year or so but think there may only be around $30k equity in the first purchased property.

As my ppor is a unit I'm looking to upgrade into a house within the next 2-3 years. If I accessed the existing equity in my ppor for more investment properties will this hinder me from being able to obtain finance for a house in 2-3 years time?
I'd be looking at houses around the $1m mark. My wife also has a property in her name which has been valued at $200k. We would sell my ppor and her property and have around $800k but if all the available equity in my ppor was used up in investment properties would I struggle to get finance for the $1m house purchase? Or would all the investors out there suggest to utilise all the available equity now and re-assess when the times comes for the upgrade?

I'm keen to hear everyones thoughts.

 

[Aaron_C]

It really depends on your income position. If you have the strength to hold onto all 4 properties and release enough equity to avoid LMI for the new house it really isn't a big deal. The only problem arises if that's not the case so you have to juggle bridging the loans for the new purchase and then selling the old one. Other than that it's quite an easy thing to do.

 

[Mick C]

You may start to have serviceability issues either soon or leading up to the 2-3 years...especially if your going for a POOR and a much larger loan.

Best to get a broker to do a forecast on your borrowing capacity based on diff situation and also good idea to include an extra buffer of 1% as i have a feeling interest rate will increase a few times within the 2-3 years mark

 

[Toto]

Thanks Aaron and Mick! Great feedback!

My income is $120k and wife's is $80k. The 3 investment properties are in my name and are currently costing me $100 per week all up to hold after tax and depreciation. If rates went to 7% they would cost $315 per week to hold. All investment loans are interest only.

We'd expect to sell my ppor for $600k and her original ppor for say $200k and have loans of $200k and $100k.

My concern is that if I use the equity available to me now to purchase another 2 or 3 properties I'll use up my serviceability for when we'd like to purchase a house around the $1m mark. We'd end up with a ppor loan of around $500k between us and the investment loans. There's probably a fair chance we may have a baby on the scene then too! Aaahhh the joys!

I'd definitely be sure to have enough equity to avoid LMI on the upgrade. Stamp duty will be fun to find then also!!

Just when you think you're doing ok the reality of housing prices in Sydney can crush you!!!

 

[Rolf Latham]

Just when you think you're doing ok the reality of housing prices in Sydney can crush you!!!

unless your IP stock is on the same rising tide

ta
rolf

 

[Toto]

unless your IP stock is on the same rising tide

ta
rolf

They are in the same rising tide Rolf but I'm buying IP's to hold and therefore not planning to use proceeds for PPOR.

Recently there has been a king tide!

 

[scottb]

Is there another strategy which sees you buying the larger PPOR now and using it as an IP until you are ready to move in?

That way you could make use of the taxation benefits of treating it as an IP, using the time it spends as an IP to reduce the non-deductible debt you will need to start paying once you're moved in and using it as a PPOR.

Is there a reason why more people don't use this strategy?

 

[Mick C]

Is there another strategy which sees you buying the larger PPOR now and using it as an IP until you are ready to move in?

That way you could make use of the taxation benefits of treating it as an IP, using the time it spends as an IP to reduce the non-deductible debt you will need to start paying once you're moved in and using it as a PPOR.

Is there a reason why more people don't use this strategy?

Capital gain tax. and the 6 years rule

 

[scottb]

Capital gain tax. and the 6 years rule

I don't quite follow - bear with me, I still have my L plates on

Are you saying that by buying earlier and treating the future PPOR as an IP for the interim - he will be subject to CGT based on any increase in val from the initial purchase to a re-val at the finish of this interim period at which point he moves in and it becomes a PPOR?

It's not clear that he will ever sell his future PPOR and therefore trigger a CGT event, only the current PPOR would be sold - which I presume would not be subject to CGT (PPOR exemption) regardless of any other purchases made.

If we make the assumption that there is an exit strategy that sees the future PPOR sold at some stage - the CGT payable on a 2-3 period where the property was treated as an IP would be relatively low in the scheme of things, and would get lower in "real terms" over the years due to inflation etc.

Where does the 6 year rule come into it?

 

[Mick C]

Sorry it's been a long day and your post seems to be a question on top of a question on top ....

Im not an accountant but from my understanding ill try to keep it simple.

1. If the property was bought and was an IP from day 1; than it will automatically will trigger an CGT event in the future even if it becomes an PPOR in the future ( some very small exception to this)

2. The no CGT rule ( 6 years rule) comes only in play if you lived in the property from day 1 and from the day you move out and make it an IP it will still be CGT exempt as long you haven't declared other place as an PPOR, you move out for some good reason ( some example on ATO websites) and you sell or moved back in within the 6 years.

http://www.ato.gov.au/Media-centre/Articles/Moving-on--Remember-the-six-year-rule-for-CGT/

http://www.ato.gov.au/General/Capit...ng-as-your-main-residence-after-you-move-out/

Always a good idea to get your broker or bank to structure the loan correctly for your future short and long term goals and always speak to your accountant - don't make assumptions.

Cheers

I don't quite follow - bear with me, I still have my L plates on

Are you saying that by buying earlier and treating the future PPOR as an IP for the interim - he will be subject to CGT based on any increase in val from the initial purchase to a re-val at the finish of this interim period at which point he moves in and it becomes a PPOR?

It's not clear that he will ever sell his future PPOR and therefore trigger a CGT event, only the current PPOR would be sold - which I presume would not be subject to CGT (PPOR exemption) regardless of any other purchases made.

If we make the assumption that there is an exit strategy that sees the future PPOR sold at some stage - the CGT payable on a 2-3 period where the property was treated as an IP would be relatively low in the scheme of things, and would get lower in "real terms" over the years due to inflation etc.

Where does the 6 year rule come into it?

 

[scottb]

Thanks for the reply Mick and apologies for the 101 questions - I'll curb my enthusiasm and go do some reading at the ATO site

This particular strategy discussed and the OP's situation particularly piqued my interest because I read a lot about people converting PPORs to IPs, but not so much vice versa!